Just try it

Eighteen months ago the federal government started to track your house. Everybody’s house, actually, whenever it’s bought or sold. Originally the move was clad in language suggesting it was some kind of mechanism to keep tabs on evil foreigners. But now we know better. It’s a step on the path which could lead to the taxation of capital gains on principal residences or, at the least, a levy on speckers and flippers who live in houses for a short period of time.

On Monday more evidence of why. Ottawa published its latest book of ‘tax expenditures’ showing that the government lost $7.1 billion in revenue last year by letting people keep the profits they made selling their homes. That’s huge. Compare it to the $1 billion that TFSAs ‘cost’ the government. Or just $115 million to finance all the registered education savings plans for kids. Or the $8.6 billion in tax not collected because of RRSP contributions made in 2017.

And here’s the government’s justification for not taxing profits on houses the same way it taxes gains in the value of your stocks or ETFs:

This measure recognizes that principal homes are generally purchased to provide basic shelter and not as an investment, and increases flexibility in the housing market by facilitating the movement of families from one principal residence to another in response to their changing circumstances

Well, we all know that’s a crock. In Canada’s largest cities real estate has become not only the opiate of the masses, but the common dude’s one-asset investment, financial and pension strategy. As mentioned here in the past, 14% of all GTA families own more than one property, for example. This underscores the fact that housing is where most people put most of their net worth. They leverage themselves to the gills and ‘play’ the housing market. Half of all the condos sold last year went to ‘investors’ who may decide to move in a for a while so they can game the tax system. Real estate’s an addiction, not basic shelter.

Of course, the man knows that. Hence the October, 2016 change requiring you to report any transaction regarding your home. It’s on Schedule 3 of the tax return. If you don’t fill it out the penalty could amount to $8,000. Worse, if you fail to report that you sold a house and made money, the entire profit could be subject to capital gains tax. Sucks.

Here are a few other points to remember: if you owned a home jointly with your squeeze, then each of you must report 50% of the proceeds on your returns. Also, if you rented your house out for a while, then capital gains tax could be applicable upon selling it. There’s a actually a formula to figure that out:

(# of years home is principal residence + 1)  x capital gain

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# of years home is owned

You can designate a cottage (or a boat, or RV if you’re really weird) as your principal residence. But remember only a single PR can be designated in any one year, so choose the property that has appreciated the most. Gains on any others will be taxable for that year.

Also be aware that not all of the property you inhabit as a PR can escape tax. People in the country on 2- or 5-acre lots, for example, are often shocked to learn the exemption applies to only half a hectare (about 1.2 acres) of land. The rest is fair game for Mr. Fairness to whack.

Husband and wife can have only a single principal residence between them (years ago each could claim one). When selling, in addition to Schedule 3 you also must fill out a form disclosing how long you’ve owned the property and what you received (plus any years you rented it out). This is statistical gold for the feds, allowing a massive database to be built, establishing the foundation for future revenues. If you think they’re going to let $7.1 billion dollars fly out the window every year, think again. The moisters believe everyone with a house is rich.

If you sell and lose money on the deal (lots of that starting to happen), the loss is not tax-deductible. You eat it. If you rent out a portion of your home to earn income, the other portion will result in a tax bill when you sell. But there is an exception – a way to ensure you can have a tenant and still retain full PR status on the property. Here’s what the CRA says:

We will consider the entire property to maintain its nature as a principal residence in spite of the fact that you have used it for income producing purposes when all of the following conditions are met:
* The income producing use is ancillary to the main use of the property as a residence.
* There is no structural change to the property.
* No capital cost allowance is claimed on the property.

So, rent your basement, if you want, but you can’t build a separate outside entrance to the suite, or put in a bathroom in order to lease it. And be careful about what the CRA calls a ‘change in use’ when you decide to take in a tenant. That’s considered a phantom sale of the property and “you are considered to have sold the property at its fair market value and to have immediately reacquired the property for the same amount. You have to report the resulting capital gain or loss (in certain situations) in the year the change of use occurs. If the property was your principal residence for any year you owned it before you changed its use, you do not have to pay tax on any gain that relates to those years. You only have to report the gain that relates to the years your home was not your principal residence.”

Of course you have to report all funds received (taxed fully as income) but you can rent your house out for four years (or maybe longer) and still have it considered a PR in certain circumstances – like getting a job more than 40 clicks away.

By the way, Ottawa’s ‘tax expenditures’ document this week is forecasting a 13% drop in the missed revenue on houses in 2018 and a further decline the year after. Do they expect prices to fall that much, or is there something else in store for us?